Question

kmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 225,000 Working capital needed $ 80,000 Overhaul of the equipment in year two $ 7,000 Salvage value of the equipment in four years $ 10,000 Annual revenues and costs: Sales revenues $ 360,000 Variable expenses $ 175,000 Fixed out-of-pocket operating costs $ 81,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Round your final answer to the nearest whole dollar amount.)

Answer 1

Answer: Calculation of Net Present Value: Now 1 3 4 Purchase of Equipment Working Capital Investment Sales Variable Expenses Fixed out of Pocket Costs Overhaul of Equipment Working Capital released Salvage Value of Equipment Total Cash Flows PV Factor @ 17% Present Value of Cash Flows Net Present Value -225,000 -80,000 360,000 360,000 360,000 360,000 -175,000 -175,000 -175,000 -175,000 -81,000 -81,000 -81,000 -81,000 -7,000 80,000 10,000 -305,000 104,000 97,000 104,000 194,000 1.000 0.855 0.731 0.624 0.534 -305,000 88,920 70,907 64,896 103,596 23,319